No End in Sight: Managing Latent Defect Exposure in a Post-Jacobs Engineering World

For this week’s Guest Post Friday post here at Construction Law Musings, we welcome first time poster Matt Bouchard.  Matt is a partner with Lewis & Roberts, PLLC in Raleigh, North Carolina.  For over ten years his practice has focused on representing the interests of contractors, sureties and owners in connection with commercial construction projects.  You can follow his blog, “N.C. Construction Law, Policy & News.”  You can also follow him on Twitter @MattBouchardEsq.

The U.S. Supreme Court decided last week not to review the November 2011 decision of the Minnesota Supreme Court upholding Minnesota legislation that resurrects long-extinguished design defect liability.

The high court’s refusal to consider Jacobs Engineering Group, Inc. v. State of Minnesota was disappointing to the Associated General Contractors of America, American Society of Civil Engineers and other construction organizations who had asked the court to consider whether retroactive revival of latent defect liability after the applicable statute of repose had expired violated constitutional due process principles.  Construction industry risk managers are now left to pick up the pieces and figure out ways to manage what might be called “retroactive claim revival risk” going forward.

And so I’ve been spending the past week “musing” about the long-term repercussions of the Jacobs Engineering case and how risk managers might address those consequences.  Before jumping into that discussion, a brief review of the case provides helpful background.

How We Got Here

Jacobs Engineering arises from the tragic collapse of a portion of the I-35W Bridge in Minneapolis spanning the Mississippi River (and nothing herein is in any way intended to trivialize the magnitude of that tragedy, from which 13 people died and another 145 were injured).

In response to the catastrophe, the State of Minnesota established a fund to compensate the victims and their families, ultimately paying them over $36 million.  The legislation authorizing the fund permitted the state to seek reimbursement from parties responsible for the collapse, “[n]otwithstanding any statutory or common law to the contrary.”  Minn. Stat. § 3.7394, subd. 5(a).

The state sued two entities who had performed recent inspection and maintenance work on the bridge, and then those parties third-party complained against Jacobs Engineering, who had acquired the assets of the bridge’s engineer-of-record in 1999.  The state subsequently asserted a cross-claim against Jacobs for negligent design as successor-in-interest to the original engineer.

Construction of the bridge had been completed in 1967, and in light of Minnesota’s 15-year statute of repose for latent defect claims, any liability the engineer-of-record may have had for negligent design expired in 1982.

The Minnesota courts, however, interpreted the “[n]otwithstanding any statutory or common law to the contrary” language of the compensation fund legislation as trumping the statute of repose, even though that effectively meant liability that had been extinguished for some 25+ years prior would be revived.

Jacobs argued that outcome would violate its constitutional right to due process, but the courts — including Minnesota’s Supreme Court — disagreed.  Although the state’s highest court found that Jacobs’ predecessor had a vested property interest protected by due process once the 15-year statute of repose had expired, it also found that the state legislature had a rationale basis for reviving liability, because the “Bridge collapse … was a ‘catastrophe of historic proportions.'” (citing the legislation itself).  The court therefore held that the reimbursement provisions of the compensation legislation did “not violate Jacob’s constitutional right to due process by retroactively reviving a cause of action previously extinguished by the statute of repose.”  In re Individual 35W Bridge Litigation, 806 N.W.2d 820, 833 (Minn. 2011).

The U.S. Supreme Court’s refusal, without comment, to hear Jacobs’ appeal means Minnesota is now free to pursue Jacobs for reimbursement.  That ostensibly means attempting to prove that Jacobs’ predecessor-in-interest negligently designed the bridge back in the early 1960’s, and that Jacobs, as successor, has assumed its predecessor’s liability.

Where We Go From Here

What long-term impacts might the I-35W bridge collapse litigation have on the construction industry going forward, and how might risk managers address those impacts?  Here are my preliminary musings on these questions:

(1)  It would be unwise to consider the case an anomaly.  This country’s infrastructure is aging, and in many places unsafe.  Making matters worse, the folks in D.C. can’t seem to agree on how to fund long-term public infrastructure improvements (anyone who’s been following the current SAFETEA-LU reauthorization effort knows exactly what I’m talking about).  In this environment, it is regrettably not difficult to imagine a similar tragedy occurring elsewhere in the future.  And if that were to happen, the state in which such an incident might occur would have a blueprint for casting the widest possible net in seeking reimbursement from all potentially responsible parties, no matter how much time may have passed since those parties were involved in design or construction activities.

(2)  Different states are likely to establish different rules of the road.  Given the U.S. Supreme Court’s reluctance to get involved in the Jacobs Engineering case, each state is now free to conduct its own due process analysis and reach results entirely different from what the Minnesota Supreme Court has held.  For example, designers and contractors in Florida likely don’t have to worry that their state legislature could pull off what Minnesota’s has.  Per that state’s highest court: “Once barred, the legislature cannot subsequently declare that ‘we change our mind on this type of claim’ and then resurrect it. Once an action is barred, a property right to be free from a claim has accrued.”  Agency for Health Care Admin. v. Assoc. Indus. of Fla., Inc., 678 So.2d 1239, 1254 (Fla. 1996).  Simply put, retroactive claim revival risk will differ on a state-by-state basis.

(3)  E&O carriers and performance bond sureties will figure out ways to price the risk.  Whether it’s adopting tighter underwriting standards, raising premiums, drafting new policy exclusions and/or other employing other risk management tools, errors & omissions insurance carriers and performance bond sureties are likely to devise ways to spread the risk of retroactive claim revival to the folks they insure/bond.

(4)  Some players could exit the public infrastructure construction market altogether.  If the risks of designing and building bridges, power plants etc. are perceived to be too great, some entities that are currently in that line of work might consider shifting their business focus.  That could result in less competition and, by extension, greater project cost.  Which means less project value to the taxpaying public.

(5)  Contracting parties may try to find strategic opportunities to address the risk during a project.  While it may be difficult, if not impossible, to negotiate an appropriate waiver of retroactive claim revival risk on hard-bid public projects, perhaps contracting parties can find opportunities when negotiating change orders or closing out a project to draft carefully crafted waiver language addressing the risk.  A well-worded waiver wouldn’t be a defense to third-party claims, of course, but could provide the basis for a contractual defense against owners.

(6)  Design and construction companies looking to buy out competitors will need to be extremely careful going forward.  Each state has different successor liability rules.  An acquiring company will want to hire excellent mergers & acquisitions counsel to ensure those rules are followed – and to ensure as little of a target company’s liabilities are assumed as possible.

It will be interesting to see how the industry responds, and it would be my pleasure to provide an update in the future.  For now, many thanks to Chris for the opportunity to be a part of his blogging community.